Stock Index Arbitrage in the Turkish Market

Abstract

For the first time in the Turkish stock market, the width of the zero arbitrage band for BIST 30 stock index arbitrage is measured and decomposed into distinct contributions arising from commissions, fees, bid/offer spreads and stock loan costs. This study also extends the literature of stock index arbitrage by utilizing intraday data to compute returns for forward and reverse BIST 30 arbitrage once per minute for 2014 and 2015 futures contracts. These returns enable identification of the frequency for profitable executions net of all costs. The absence of profitable trades and the unusual persistence of BIST 30 futures priced below their costless theoretical fair value are explained by their position within zero arbitrage band thresholds. Decomposition and measurement of arbitrage cost elements confirms the identification for regulators of the need for policies to encourage continuing development of domestic stock loan capabilities that ultimately should improve futures pricing efficiency. The relative attractiveness of present BIST 30 index arbitrage is compared with that occurring a decade ago thereby contributing to the growing literature on the evolution of futures pricing efficiency in global markets after introduction of index futures.